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lmsmedley

Loans Against Defined Benefit Plan?

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I have a lifetime defined benefit pension from a plan rated GREEN, has $3 billion in assets, and is 86% funded.

Are there any lending entities who will lend against the monthly payment, if i have it contractually designated to be deposited

in the lender's account each month, and back it with a term life policy?

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Doubtful because lenders know that qualified plan interests cannot be assigned, so they will not lend"against it", meaning they will not accept it as security because it will fail as security when the lender seeks to foreclose.  Any contractual designation to deposit the payment must be revocable at will and lenders do not like to be subject to the whim of borrowers.

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Agree completely with QDROphile. The provisions allowing revocable assignment are in 1.401(a)-13(d) and (e). Of course, the lender could and should take into account that this is an income source for you when considering your ability to repay the loan.

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The DB plan could adopt loan provisions and loan the participant money - similar to but different than a loan from a 401k plan.  No plan I am familiar with does that,  it I believe a few do offer loans.  Feel  free to connect with me on LinkedIn if you want to approach the plan sponsor with a proposal.

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Query:  It is clear that a Participant cannot alienate his interest in a defined benefit plan except via a QDRO.  But can an Alternate Payee alienate her interest is a defined benefit plan by pledging it as collateral or otherwise?  It seems to be that the antialienation exemption under 26 USC  401(a)(13)(B) applies to the right of a Participant to transfer benefits to an Alternate Payee pursuant to a QDRO, but it doesn't address the right of the Alternate Payee to alienate the benefits received from the Participant.  

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27 minutes ago, fmsinc said:

Query:  It is clear that a Participant cannot alienate his interest in a defined benefit plan except via a QDRO.  But can an Alternate Payee alienate her interest is a defined benefit plan by pledging it as collateral or otherwise?  It seems to be that the antialienation exemption under 26 USC  401(a)(13)(B) applies to the right of a Participant to transfer benefits to an Alternate Payee pursuant to a QDRO, but it doesn't address the right of the Alternate Payee to alienate the benefits received from the Participant.  

I have never seen a plan that permitted an alternate payee to alienate his/her interest, and  I think that the same policy reasons why the law does not permit alienation by the participant would apply. Note also that based on the wording of IRC sec. 401(a)(13), I don't think that the premise of your query is correct, fmsinc. It states that "benefits provided under the plan" may not be alienated, without specifically tying that requirement to the term "participant." The language of the reg is the same. See 1.401(a)-13(b)(1). Of course, one would also expect that the benefits of a beneficiary of a deceased participant would also be subject to the anti-alienation rule.

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Luke Bailey:  26 CFR 1.401(a)(3)(b)(1) does provide: 

"(b) No assignment or alienation -

(1) General rule. Under section 401(a)(13), a trust will not be qualified unless the plan of which the trust is a part provides that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process."

But if you click on the link imbedded at the word "benefits", you get a reference to 26 CFR § 1.414(f)-1: 

"4) Benefits. The plan provides that the amount of benefits payable with respect to each employee participating in the plan is determined without regard to whether or not his employer continues as a member of the plan. If benefits accrued as a result of the participant's service with his employer during a period before such employer was a member of the plan, this requirement does not apply to the amount of those benefits, except that this requirement does apply to the amount of those benefits (i) which are accrued benefits derived from employee contributions, or (ii) which are accrued under a plan maintained by an employer prior to the time such employer became a member of the plan to which the requirements of this paragraph (a) are applied."

A basic rule of statutory construction is that, if the legislature had intended to include alternate payees, they could very simply have said "alternate payees", and that the omission of those two words is evidence that they did not intend to preclude alternate payees from alienating their derivative benefits. 

And see 26 USC 1056(d)(1) providing that "Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated."  And 26 USC 1056(d)(3)(A) providing: 

"Paragraph (1) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that paragraph (1) shall not apply if the order is determined to be a qualified domestic relations order. Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order."

So it looks to me that they have abrogated ALL antialienation requirements with respect to a transfer pursuant to a QDRO.  It is hard to argue that they only abrogated the antialienation provisions with respect to Participants while keeping such a restrictions on Alternate Payees, but failed to mention that simple fact. 

But, you say, the Alternate Payee's benefits are merely part of the Participant's benefit and logic dictates that they be treated the same.  That may be true of a shared interest allocation, but not a separate interest allocation.   But, you say, doesn't the Alternate Payee's share of the Participant's benefits terminate on the death of the Alternate Payee and cannot be assigned by the Alternate Payee to another beneficiary?  Under FERS and CSRS the Alternate Payee/Former Spouse can leave her share to her estate (or others) per 5 CFR 838.237.  And see this article at - https://corporate.findlaw.com/human-resources/transferring-the-alternate-payee-s-retirement-benefits-at-death.html#:~:targetText=In practice%2C this allows an,the alternate payee and participant.

One of the most interesting observations in the above article is that "Although ERISA provides that an alternate payee under a QDRO is considered a beneficiary under the plan, nothing in ERISA prevents a plan from granting an alternate payee the same or similar rights as a participant."  So why can't a Plan afford the Alternate Payee to provide for a survivor annuity as one form of alienation?

The Shelstead case discussed in the above article was discussed by the Court of Special Appeals of Maryland in Eller v. Bolton at - https://scholar.google.com/scholar_case?case=14971316948354987133&q=eller+v.+bolton&hl=en&lr=lang_en&as_sdt=4,21&as_vis=1

In also discussed other cases where the question considered was whether an Alternate Payee can transfer benefits to a subsequent beneficiary.  See,  Divich v. Divich, 665 N.W.2d 109 (S.D.2003), and  Seal v. Raw, 954 S.W.2d 681 (Mo.Ct.App.1997).

The point, of course, is that the person who posted the query, who is in pay status, might be able to transfer a portion of his pension annuity to an Alternate Payee, who could then use that entitlement as collateral for a loan.  N'est-ce pas?  Suppose he is happily married and has no children, you ask?  Well he could get divorced, get the QDRO approved by the Plan, and remarry his spouse.  FRAUD!! A SHAM!! you indignantly proclaim.  Not so.  Read Brown v. Continental Airlines, Inc., 647 F. 3d 221 (5th Cir., 2011)
https://scholar.google.com/scholar_case?case=4019345202025914766&q=brown+v.+continental+airlines&hl=en&as_sdt=20000003

one of my favorite cases. 

David

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fmsinc, you argue the point well, but (a) the repeated use of the phrase "with respect to" would give me pause, i.e., quite arguably the AP's interest in the plan, whether separate interest or not, is "with respect to" the employee, because derived from it, and (b) one would think that by this time there would be a case permitting it, if it could be done. But who knows. I can only say, I remain skeptical.

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I agree with you that the odds are not good.  BUT, here in Maryland (and in may other states as well) the courts have determined that survivor annuity benefits are a separate item of marital property, and that unless a party specifically asks for survivor annuity benefits in his/her Complaint, or unless the written Agreement of the parties or the Judgment of Absolute Divorce specifically addresses/awards survivor annuity benefits, the Alternate Payee does not get them.   There is no logic to this since, among other reasons, the survivor annuity benefits arise from the same Plan document as does the entitlement to retirement annuity benefits, and cannot exist or be defined except with reference to the retirement annuity benefits.   So I don't trust the courts not to use twisted logic to come up with a result that nobody could predict.  

On the other hand, in one case,  Blaine v. Blaine, 336 Md. 49, 646 A. 2d 413 (1994), the Court of Appeals that, 

“Even where the language of a statute is plain and unambiguous, we may look elsewhere to divine legislative intent; the plain meaning rule is not rigid and does not require us to read legislative provisions in rote fashion and in isolation. Motor Vehicle Admin. v. Shrader, 324 Md. 454, 463, 597 A.2d 939 (1991).”

Not what we learned in law school about statutory interpretation. 

One would hope for a more reasoned approach from Federal Courts, but you never know.  

David  

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